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Working Paper

Ethiopia’s Growth Acceleration and How to Sustain It : Insights from a Cross-Country Regression Model

ECONOMIC BOOM FORECASTS GROWTH RATES MONETARY POLICY GOVERNMENT EXPENDITURES POLICY REFORMS ECONOMIC GROWTH NATIONAL ACCOUNTS CAPITAL ACCUMULATION LAGS REAL INTEREST RATES VALUATION STRUCTURAL CHANGE STABILIZATION POLICIES INCOME INTEREST MACROECONOMIC MANAGEMENT INVESTMENT RATE MARGINAL COST INTEREST RATE REAL GDP EXCHANGE MACROECONOMIC POLICY GDP PER CAPITA TELEPHONE COVERAGE RESOURCE ALLOCATION LIQUIDITY EXPORTS DEVELOPING COUNTRIES MARGINAL PRODUCT POLITICAL ECONOMY GROWTH MODEL PUBLIC INFRASTRUCTURE ECONOMIC POLICY DEVALUATION HIGH INFLATION VARIABLES TRADE OPENNESS BENCHMARKS INPUTS DEVELOPMENT GOALS INFLATION TRENDS ECONOMIC OUTLOOK CENTRAL BANK LENDING BANK LENDING CENTRAL BANK DEVELOPMENT INDIVIDUAL POLICIES STANDARD DEVIATION INFLUENCE EMPIRICAL RESULTS TOTAL FACTOR PRODUCTIVITY PER CAPITA INCOME EXPORT GROWTH TELECOMMUNICATIONS LOW-INCOME COUNTRIES INCOME INEQUALITY ECONOMIC DOWNTURNS RELATIVE IMPORTANCE BASE YEAR PRODUCTIVITY ECONOMETRICS INDUSTRIALIZATION MONOPOLY DEMOCRATIC INSTITUTIONS DEBT PER CAPITA GROWTH INFLATION RATE INCOME LEVELS ECONOMIC REFORMS TRADE POLICY BASKET OF GOODS NATURAL RESOURCES AVERAGING INTEREST RATE EFFECT PUBLIC INVESTMENT MACROECONOMIC STABILIZATION EXTERNAL FACTORS TAXES INFRASTRUCTURE INVESTMENT LEADING INDICATORS PRODUCTIVITY GROWTH CONSUMPTION EMPIRICAL GROWTH MODEL HUMAN CAPITAL VALUE ADDED OPPORTUNITY COST CAPITAL WAGES POPULATION SHARE INTERNATIONAL TRADE OPEN MARKET OPERATIONS ECONOMETRIC ANALYSIS MACROECONOMIC OUTCOMES FINANCIAL POLICIES EXTERNAL CONDITIONS VALUE BENCHMARKING COMPETITIVENESS CREDIT MACROECONOMICS STATE-OWNED ENTERPRISES NATIONAL INCOME FACTOR PRICES AGRICULTURE GROWTH MODELS MEASUREMENT ERROR TERM REAL EXCHANGE RATE BENCHMARK ECONOMIC THEORY GLOBAL CONDITIONS POLICY PERSPECTIVE ECONOMICS FIXED EFFECTS TRADE GDP GOODS THEORY FINANCIAL DEVELOPMENT GROWTH RATE INVESTMENT GROWTH POLICY GROWTH REGRESSIONS TOTAL FACTOR PRODUCTIVITY GROWTH CREDIT RATIONING GROWTH PERFORMANCE POVERTY GROWTH REGRESSION COUNTRY CHARACTERISTICS ECONOMIC TRENDS GINI COEFFICIENT OVERVALUATION CAPITAL ACCOUNTS POLICY RESEARCH GROWTH POLICIES HIGH GROWTH MACROECONOMIC POLICIES EXCHANGE RATE PUBLIC SPENDING OUTCOMES CONSUMPTION INCREASES DEVELOPMENT INDICATORS POSITIVE EFFECTS MIDDLE INCOME COUNTRIES PRICES LONG RUN GROWTH PROJECTIONS DEVELOPMENT POLICY HUMAN DEVELOPMENT FUTURE RESEARCH GROWTH
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World Bank, Washington, DC
Africa | Ethiopia
2015-07-14T22:18:53Z | 2015-07-14T22:18:53Z | 2015-06

Ethiopia has experienced a growth acceleration over the past decade on the back of an economic strategy emphasizing public infrastructure investment and supported by heterodox macro-financial policies. To analyze the country’s growth performance during 2000–13, the paper employs a neoclassical cross-country System Generalized Method of Moments regression model. The analysis finds that accelerated growth was driven by public infrastructure investment and restrained government consumption, and supported by a conducive external environment. Macroeconomic challenges arising from declining private credit, real currency overvaluation, and relatively high inflation held back some growth. The model accurately predicts Ethiopia’s growth over the period of analysis and is robust to country-specific parameter heterogeneity and alternative infrastructure variables. Looking ahead, model simulations under alternative policy scenarios are indicative that growth may decelerate in the coming decade, making it challenging for Ethiopia to attain its middle-income country target by 2025. Although simulated growth rates do not vary much by policy scenario, the paper discusses some of the emerging risks associated with a continued reliance on the current infrastructure financing model and potential future adjustments.

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